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GMO’s Jeremy Grantham sees prolonged credit crisis

NEW YORK (Reuters) – The credit crisis that has ravaged
world markets since last summer will fester for years and
result in anemic economic growth in Japan, the United States
and most of Europe through 2009, according to an influential
Wall Street investor.

A combination of tighter global lending standards, rooted
in mounting mortgage defaults, and falling U.S. and European
home prices could eat deeply into already slowing growth
worldwide, Jeremy Grantham, chairman and market strategist of
money manager GMO LLC, said in an interview late Tuesday.

Grantham, who had warned of the danger that the U.S.
housing market posed long before others, said the current
credit crisis has “got many more tentacles… than the ones
we’ve seen over the last 30 years.”

“We are in a recessionary phase that will last perhaps two
and two and a half years,” said Grantham, who helps oversee
about $126 billion in assets at GMO.

“It will be, interestingly, unlike anything else we’ve

Grantham, often called a “perma-bear” for his dour view on
U.S. equities, correctly predicted a crash two months before
the technology bubble burst in 2000.

His outlook for the environment now is grim, if not dire.

He recommends investors hold cash, and if they must be
invested, he favors large-cap U.S. equities.

The United States and other economies might not be savaged
by negative quarters of growth, but the sentiment will be
“quite novel in feel without the theatrical aspect of a real
nose-dive. With any luck… we won’t have them,” he said.

Rising asset prices and a credit binge that drove the U.S.
economy for 25 years is over and won’t return for years to
come, he said. That “end of an era” will slow economic growth
and force both U.S. consumers and companies to readjust,
Grantham added.

“We had a debt bubble in almost every nook and cranny, and
in different times they are deflating,” he said. Now, the world
is dealing with the secondary effects of slowing consumer and
corporate consumption, Grantham said.

Central bankers, who have been “really quite incompetent,”
will do everything possible to prevent a vicious cycle downward
of lower consumption and lower production, he said.

Grantham, who is amazed at how smart investors failed to
see the housing bubble and ensuing crisis, is also surprised by
those who express little concern about China’s centrally
planned economy and the strong likelihood of slower growth.

“Why have they become wonderful economists?” Grantham said.
“What they have done is they have become wonderfully lucky like
the rest of us.”

The odds that China, a major driver of global economic
growth this decade, will stumble seem extremely high, he said.
A Chinese downturn would send shockwaves through many economies
that depend on its voracious demand for raw materials.

A third effect of weaker production and eventually rising
unemployment in the United States, Europe and Japan, and even
in some emerging countries, also will take its toll.

Added together, a more prolonged and painful recession than
anyone has imagined will occur, an economic downturn that will
come closer in global reach to anything the world has seen
since the Great Depression, Grantham said.

“The possibility of it becoming very serious on a global
basis is very much higher than 2001, 2002,” he said. “That’s
the scary part.”

Where should investors hide? Grantham said large-cap U.S.
stocks provide “an absolute guaranteed no-brainer

“Their profit margins are the only profit margins in any
group we look at anywhere that aren’t measurably above average
at all,” he explained. “Everything else, the profit margins are
way over average globally, including emerging markets — very
vulnerable, hugely mean-reverting,” he warned.

Grantham said they have lagged other asset classes over the
past six years: “They’ve been left behind, exactly the time you
would need them.”


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